Negotiable Instruments Act, Section 7

Negotiable Instruments Act, Section 7: Drawer, Drawee, Acceptor, and Payee

Section 7 of the Negotiable Instruments Act, 1881 lays down the meaning of several foundational terms that define the roles of different parties involved in a bill of exchange or a cheque. 

These terms are essential for understanding who creates the instrument, who is directed to make payment, who undertakes the liability to pay, and who is entitled to receive the money.

1. Drawer

The drawer is the person who creates the bill of exchange or cheque.

In the case of a bill of exchange, the drawer is the person who orders another person to pay a certain sum of money to a specified person.

In the case of a cheque, the drawer is the account holder who issues the cheque directing the bank to make payment.

Thus, the drawer is the originator of the instrument and the person who sets the payment process in motion by issuing the written order.

2. Drawee

The drawee is the person who is directed by the drawer to make the payment.

In a bill of exchange, the drawee is usually a debtor of the drawer, whereas in a cheque, the drawee is always the bank on which the cheque is drawn.

The drawee is not automatically liable to pay merely because his name appears on the instrument. His liability arises only when he accepts the bill (in case of a bill of exchange).

3. Drawee in Case of Need

Sometimes, a bill of exchange or an endorsement on it may mention an additional person to be approached if the original drawee refuses to accept or pay the bill.

Such a person, known as the drawee in case of need, is a contingency arrangement that the holder of the bill may approach if the primary drawee defaults, providing an additional layer of security and assurance of payment, and this concept applies only to bills of exchange and not to cheques.

4. Acceptor

The acceptor is the drawee who has formally agreed to honour the bill of exchange.

A drawee becomes an acceptor when he signs his assent on the bill and either delivers the signed bill back or gives notice of such acceptance to the holder, and if the bill is drawn in multiple parts, signing any one part is sufficient.

By accepting the bill, the acceptor undertakes a legal obligation to pay the amount mentioned in the bill when it becomes due. From this point, the primary liability to pay shifts from the drawer to the acceptor.

This concept is relevant only to bills of exchange, as cheques do not require acceptance by the bank.

5. Acceptor for Honour

An acceptor for honour arises in exceptional circumstances.

When a bill of exchange has been noted or protested for non-acceptance, or noted or protested for better security,

Any third person may step in and accept the bill for the honour of the drawer or any indorser. This acceptance is called acceptance supra protest.

Such a person is known as the acceptor for honour.

This is done to preserve the credit and reputation of the drawer or indorser.

The acceptor for honour becomes liable to pay the bill if the original drawee fails to do so.

6. Payee

The payee is the person who is entitled to receive the money under the instrument.

He is the person named in the bill, cheque, or note, or the person to whose order the money is directed to be paid.

The payee is the rightful recipient of the payment and may further transfer the instrument by endorsement, where permitted.